Moving from farm jobs to services: How can India hasten the transition?

The barriers to entry in manufacturing, and India’s widespread fluency in English — a boon in global services — suggest comparative advantage lies in services

India’s population today looks like China’s in 1980. A massive, young, rural workforce could turbocharge growth, or torpedo political stability. China solved the problem by going from farm to factory. For India, entrenched global supply chains and domestic policy failures mean that path will be difficult to follow. Another is more accessible. India is going from the farm to services. That process is already underway. Indeed, our analysis shows the official data may be missing the speed of the transition.

There is work still to be done. The government needs to do more to create a supportive environment for a services sector that can compete on the global stage. Failure to do so would leave many in India’s 870 million-strong working-age population cooling their heels — turning a demographic dividend into a disaster.

Why India Won’t Follow China’s Path

Global supply chains for manufacturing of consumer goods and industrial machinery are more or less firmly entrenched.

With India’s tough labour laws and higher bureaucratic entry barriers into manufacturing relative to services, trying to raise the share of manufacturing in GDP would be an uphill battle. Raising taxes on consumer imports, as was done in the Union Budget 2018, is likely to be counterproductive as it hurts associated service jobs in logistics, marketing and trading.

Taken together, the barriers to entry in manufacturing, and India’s widespread fluency in English — a boon in global services — suggest comparative advantage lies in services.

Rather than deploying scarce public resources trying to increase India’s share in global manufacturing, a more productive use would be to focus on integrating the economy into the higher links of the global services supply chain. To that end, the government could take the following steps:

•Fast-track the formulation of a comprehensive e-commerce policy to help start-ups and existing companies reduce policy uncertainty.

•Provide fiscal incentives to online service aggregators, including lower goods and services tax rates or other tax benefits, until they reach a certain size and scale.

•Provide fiscal subsidies for training programs to improve skills. The government could consider direct benefit transfers to candidates seeking to enroll in such programs.

Tracking the Transition

The quality of India’s labour statistics is poor — the sample for quarterly surveys provide information on less than 15 per cent of the workforce. Annual surveys, which were more comprehensive but released after a long lag, have been discontinued since 2016. A recent initiative by the Reserve Bank of India — India-KLEMS research project — uses survey data to interpolate employment statistics from India’s comprehensive quinquennial employment-unemployment surveys. The figures provide a sector breakdown of employment on an annual basis, and show total employment at roughly 480 million workers at the end of fiscal 2016.

Based on the official data, the share of agriculture in overall employment dropped from 70 per cent in 1981 to 42 per cent in 2016, with growth in services (31 per cent share vs 17 per cent) and construction (14 per cent share vs 2 per cent) far outpacing industry (12.5 per cent from 11 per cent).

India’s Transition From Farm to Services

The economy has undergone a major structural transformation since the last comprehensive employment-unemployment survey in 2011-12, owing partly to rapid growth of internet-based startups. Our view is that output and employment in the unorganized service sector is probably rising at a faster rate than captured in the official statistics.

What the Official Data Won’t Tell You

A younger demographic profile — more than 60 per cent of India’s population is under 35 — rising mobile internet penetration with over 300 million smartphone users, a shift from joint to nuclear families, and an emerging middle class are all increasing demand for services.

•The experience of UrbanClap, an online marketplace that connects consumers to a range of household service professionals, suggests official data do not capture the full impact of these emerging aggregator businesses. The company, which started in 2015, has about 500 people on its payroll — but as many as around 50,000 active service professionals registered on its platform.

•UrbanClap is registered with the Ministry of Corporate Affairs. That indicates its output is captured in the national accounts, but with a lag of a year — likely reflected in the revised GDP estimates. However, output and employment of the service professionals — mostly working as independent consultants — are not reflected in official statistics on an annual basis. Output of many professionals is likely to get captured — imperfectly via household surveys — only when base year revisions are made in the national accounts every five to seven years. UrbanClap’s projected revenue for fiscal 2019 is 1.4 billion rupees. But taking into account its service partners, combined revenue is estimated to be around 10 billion rupees, according to co-founder Abhiraj Bhal.

•Quarterly job surveys do not capture unorganized employment. Recently released payrolls data also do not capture the unorganized sector. A large proportion of the 50,000 service professionals registered on UrbanClap would probably still be working in the absence of the online platform. Even so, the presence of this platform — and others like it — has likely increased both the demand and supply of service professionals, and reduced underemployment.